3 Factors Shape Obama’s Decision on Keystone XL Pipeline

Crew work on construction of the TransCanada Keystone XL Pipeline near Winona, Texas.

PHOTOGRAPH BY SARAH A. MILLER, THE TYLER MORNING TELEGRAPH via AP

It's a "final" environmental impact statement that is anything but final.

A long-awaited analysis by the U.S. Department of State concluded Friday that there are no environmental impacts that should bar construction of the proposed Keystone XL crude oil pipeline from Alberta, Canada, to Texas. (See related: "Interactive: Mapping the Flow of Tar Sands Oil.")

Although the agency expanded its analysis of the TransCanada project's climate change and economic impacts, it reached essentially the same conclusion it staked out a year ago in a draft analysis: Canada's tar sands development, more carbon-intensive than conventional crude drilling, will happen with or without Keystone XL.

The 11-volume analysis touches off an even more intensive process of lobbying over a project that supporters paint as a lifeline to energy security and jobs and that opponents portray as the linchpin to one of the planet's most environmentally destructive enterprises. (See related: "Scraping Bottom: The Canadian Oil Boom.")

That process could move slowly.

Eight additional U.S. agencies are expected to weigh in over the next 90 days as President Barack Obama's administration determines whether construction of the transboundary pipeline, first proposed in 2008, is in the "national interest."

The State Department, meanwhile, will open a 30-day public comment period on February 5. The Departments of Energy, Defense, Transportation, Homeland Security, Justice, Interior, and Commerce, as well as the U.S. Environmental Protection Agency (EPA), all will have a say, but the final decision rests with the White House.

It's unclear what the Obama administration will decide, but here are the three big factors that will shape the decision—and, with it, define Obama's environmental legacy:

1. Climate Change

The State Department reiterated its past assessment that when taking the life cycle of Canadian tar sands oil into account, from extraction to burning in gas tanks, it emits about 17 percent more greenhouse gas than the average barrel of U.S.-refined crude oil.

But the agency concludes those emissions will occur whether or not the pipeline is built.

"Approval or denial of any one crude oil transport project, including the proposed Project, is unlikely to significantly impact the rate of extraction in the oil sands or the continued demand for heavy crude oil at refineries in the United States," the State Department said.

"Our national interest will be served only if this project does not significantly exacerbate the problem of carbon pollution," he said. "The net effects of the pipeline's impact on our climate will be absolutely critical to determining whether this project is allowed to go forward."

"Keystone XL has become a lightning rod for the environmental community in large part because it touches on the key question of whether, moving into the 21st century, we support development of one of the most carbon-intensive sources of energy in the world, or whether we really are going to move in a direction to cut greenhouse gases," says Anthony Swift, staff attorney for the NRDC. "We are at a crossroads." (See related: "Keystone XL Pipeline Marks New Battle Line in Oklahoma.")

But a new safety issue is emerging around transportation of the tar sands oil. The State Department estimated that 180,000 barrels per day of Canadian crude is now being moved to market by freight rail, up from essentially zero at the beginning of 2011.

Nearly 10 percent of U.S. production, an estimated 700,000 barrels per day—most of it from the booming North Dakota Bakken shale—is traveling by rail in the United States, which has become a top-of-agenda issue for transportation safety regulators in both countries. (See related: "Pictures: Bakken Shale Oil Transforms North Dakota.")

Energy consulting firm IHS Cera has analyzed the market trends, including oil sands projects already underway, and concluded that if Keystone XL is not built, rail will carry an increasing amount of Canadian crude until other pipelines can be built, probably by 2017 or 2018.

"A combination of new pipes and rail are going to evolve and take the market in a different way," says Jackie Forrest, IHS Cera senior director. In fact, TransCanada Chief Executive Russ Girling indicated last week that he is talking to oil and rail companies about building rail terminals in Alberta and Oklahoma if Keystone XL is not approved.

The emerging rail safety issue has substantially altered the debate on the pipeline spill issue, raising the prospect that fiery derailments in populated rail towns and cities will become the alternative to the pipeline.

But the oil train safety debate is likely to continue no matter what the Keystone XL decision is. That's because even if the pipeline goes forward, the amount of oil traveling by rail out of North Dakota alone is already nearing the 830,000 barrels-per-day capacity of the Keystone XL.

3. Jobs

The economic impact is one of the most hotly debated aspects of the pipeline. The State Department held to its initial estimate that construction would create 42,100 jobs annually over the one to two years it would take to the build the project. The agency slightly upped its estimate of permanent jobs that would be created on the Keystone XL, from 35 permanent workers to 50, hardly making the energy project a jobs-creation powerhouse.

But advocates of the pipeline argue that benefits spread far beyond creating a need for pipeline inspection, maintenance, and repair workers. "The jobs associated with construction and running a pipeline—there are different views on if it's big or small," says IHS Cera's Forrest. "But what you are really doing is looking at adding another supply of oil to the United States."

One of the most direct impacts it would have is on the economics of the refineries of the Gulf Coast, which have been specially outfitted to handle "heavy" crude oil that requires extra processing. For years, these refineries have relied on imports from Mexico and Venezuela, two other sources of "heavy" oil.

But Mexico's oil fields are declining rapidly. And Venezuela's production also has faltered, amid political and economic turmoil in that country. The Gulf Coast refiners don't want to buy the more expensive light, sweet crude that is being produced in Texas and North Dakota to run in refineries that they've outfitted to process the cheaper heavy crude.

"When they have to run those crudes, they're less profitable," says Forrest. That's why the Gulf refiners want access to Canada's heavy crude from the tar sands, and Keystone XL would be the first direct pipeline to deliver it.

If Keystone XL is not built, it eventually could affect the economics of Gulf Coast refining and put at risk the jobs in that industry.